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European Companies in China Face Challenges Due to Slower Growth and Overcapacity

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European companies in China are facing challenges as growth slows and overcapacity pressures increase, according to a survey conducted by the EU Chamber of Commerce in China. The report released on Friday revealed that in Shanghai, companies are experiencing delays in receiving payments and finding it harder to enforce contracts. State-owned enterprises are using these delays to obtain defacto loans from smaller businesses, contributing to the difficulties faced by European companies.

The economic slowdown in China, along with geopolitical tensions, has impacted the profitability of European companies operating in the country. Only 30% of survey respondents reported higher profit margins in China compared to their global averages, marking an eight-year low. This decline in profitability has been attributed to a slowdown in the real estate sector and the overall economic growth of China, with concerns raised about the depth and duration of the current economic slowdown.

Despite the challenges faced by European companies, China’s economy continues to grow, driven by manufacturing and an emphasis on tech self-sufficiency. The correlation between GDP growth and the profitability of foreign companies in China is weakening, with the composition of GDP becoming increasingly important. The National Bureau of Statistics is set to release key economic data next week, shedding light on the state of China’s economy and its impact on foreign businesses.

Overcapacity in various industries is also a concern for European companies, with more than one-third of respondents noting excess capacity in their sectors. Overproduction has led to price drops and reduced profit margins, affecting both European and Chinese companies. Efforts by Chinese authorities to attract foreign investment, such as visa-free policies and tax exemptions, have helped some industries, but more needs to be done to create a conducive environment for international businesses.

Despite some market opening in certain industries, doubts remain about the growth potential and profitability of European companies in China. Concerns about regulatory barriers and the predictability of the business environment persist, with a record number of respondents expressing skepticism about their future in China. This has led to increased cost-cutting measures, including reducing headcount and marketing budgets, highlighting the challenges faced by European companies in navigating the complex Chinese market. As these pressures become more permanent, companies are reevaluating their investment decisions and strategies for growth in China.

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